Raising the minimum wage is bad news

Commentary: Teens and low-skill workers will suffer

WASHINGTON (MarketWatch) — The unemployment rate for teens is at 23%, and the rate for unskilled workers is at 12%. Why does President Obama propose raising the minimum wage to $9 per hour and indexing it for inflation, as he stated in his State of the Union Address?

Obama and his advisors seem to believe that if the minimum wage were raised and then indexed, all workers would retain their jobs. But this is not the case.

Between 2007 and 2009, the federal hourly minimum wage rose to $7.25 in three steps from the $5.15 rate that had prevailed for a decade. If the wage were raised to $9 and then indexed for inflation, it would rise every year.

It sounds compassionate to alleviate poverty by mandating that employers raise wages, but employers often replace low-skill workers with machines. Think self-checkout machines in supermarkets, or computerized call centers.

Or, try a thought experiment — would you have your job if the minimum wage were $50 an hour? Probably not.

At its current level, the minimum wage disproportionately affects teens and low-skill workers, many of whom qualify only for entry-level slots.

University of California (Irvine) economists David Neumark and J.M. Ian Salas, together with Federal Reserve Board economist William Wascher, have written extensively on the effects of the minimum wage on employment. In a National Bureau of Economic Research paper published in January, they conclude that “minimum wages pose a tradeoff of higher wages for some against job losses for others.”

They specifically mention that a higher minimum wage results in more unemployment for teens and low-skill workers.

Why is it that some studies, such as those by Obama’s Council of Economic Advisers chairman Alan Krueger, have found that increases in the minimum wage do not affect employment in the restaurant industry?

Two reasons, according to Neumark and his coauthors. First, many restaurant workers are paid above minimum wage. Second, a higher minimum wage can encourage employers to substitute more-skilled employees for less-skilled employees, so that total unemployment in that industry does not decline substantially.

Two-thirds of minimum wage earners worked part-time in 2011, the latest year available. Only 3% of hourly wage earners earn minimum wage or less.

Workers under the age of 25 made up about half of the 3.8 million workers who earned at or below the minimum wage in 2011. Employed teenagers are seven times more likely to be among the minimum wage earners than workers older than 25.

Another 11 million workers earned between $7.26 and $8.99. Some will be in danger of losing their jobs if the minimum wage is increased.

In his State of the Union Address, Obama said that a full-time minimum-wage worker makes $14,500 a year. That’s 1.3 million workers, in a labor force of 156 million, about eight-tenths of 1%. But this understates actual income, because it does not include transfer payments.

As Michael Saltsman of the Employment Policies Institute has shown, the Earned Income Tax Credit adds to the minimum wage. Read Michael Saltsman.

In addition to the EITC, the value of the Supplemental Nutritional Assistance Program, formerly food stamps, has risen over the past 20 years, increasing the resources of low-income workers. (See chart.)

In 1992, the hourly minimum wage was $4.25. For a family with one parent and two children, the value of the earned income tax credit was 69 cents, and the value of food stamps was just over a dollar, for total income of $5.96 an hour. (Other possible benefits include housing and Medicaid, depending on the state.)

Fast forward to 2012. The minimum wage was $7.25 an hour. For the same family, the EITC rose to $2.62, and the food stamps program added $1.67, for a total of $11.54. Assuming 2,000 hours of work annually, and including the EITC, the family makes not $14,500, but $19,736. This family also qualified for food stamps, bringing the total family income to $23,072.

Unlike increases in the minimum wage, these government transfers do not discourage employers from hiring.

The minimum wage of $7.25 an hour, plus the mandatory employer’s share of social security, unemployment insurance, and workers’ compensation taxes, brings the hourly employer cost to $8, even without benefits. Raising the hourly minimum wage to $9 will bring the cost to employers to about $10.

And in 2014, employers with more than 49 workers who do not offer the right kind of health insurance will have to pay a penalty of $2,000 per worker per year, further increasing costs and discouraging hiring. Many are already cutting back or reducing workers’ hours, because no penalty is owed on those working less than 30 hours weekly.

Unemployment rates for teens and low-skill workers rose faster than others in the recession. The adult unemployment rate stood at 7.3% in January 2012. That’s over 3 percentage points higher than the 3.8% rate in December 2007, five years earlier, at the start of the recession. But the January 2012 unemployment rate for teens was about 6 percentage points higher than December 2007, at 23%.

Employers now only employ workers who can produce $8 an hour or more of goods or services. Under Obama’s proposal, they would employ only those who could produce $10 an hour, an amount that would rise every year. The government can mandate steadily rising minimum wages, but not steadily rising teen skills and productivity.

Forbidding employment of those whose skills aren’t worth $10 an hour prevents workers getting their foot on the bottom of the career ladder. Obama is essentially proposing to take away the right to work for low-skill workers.

Most American employers have to pay more than minimum wage just to attract and hold the workers they need. Almost 140 million workers now earn above minimum wage, not because of federal or state law, but because that is the only way that firms can attract and keep employees with skills.

Instead of more money for youth employment, why not expand the federal minimum wage exception for teens? Under federal law, employers are allowed to pay teens $4.25 an hour for 90 consecutive calendar days, or until their 20th birthday, at which point the wage has to revert to $7.25 an hour.

The law is not simple. Employers have to show that teen workers don’t displace others. If the state minimum laws don’t specifically include the teen exception, then teens have to be paid the regular minimum — and the large states, such as California and New York, don’t mention teens. Ninety calendar days might cover a summer job, but if teens want to continue the job during the school year, employers have to pay them the standard wage.

Youth unemployment is a serious social problem in some European countries, such as France (27%), Spain (55%), and Italy (37%). These governments have taken every possible step to discourage the young from working short of criminalizing work: wages are regulated to be high, and it is costly to hire a new worker and even more costly to let one go. In these countries, young people have a much harder time getting started up the career ladder than their American counterparts.

America does not want to go down this road. Working at an early age teaches useful skills, transferable to future jobs, such as getting to work on time, staying the whole day, and putting up with unpleasant colleagues.

Increasing the hourly minimum wage to $9 and indexing it for inflation is bad news for teens and low-skill workers who deserve a better opportunity, and it is bad news for America where we cannot afford to further cripple our economy.

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